But it warned that if the FSA implements the proposals as drafted in its consultation paper, it is probable that interest-only mortgages will effectively vanish, restricting choice for consumers.
The CML believes that the compliance costs for lenders of annually checking the existence of borrowers’ repayment methods, and the regulatory risk of the lender making a judgement on the adequacy of the repayment method, would prove prohibitive.
In its submission, the CML acknowledges concerns about borrowers having a shortfall at the end of their term, and lenders being exposed to a prudential risk by having a number of borrowers with unknown repayment methods.
However, the number of borrowers with a shortfall at the end of their term is extremely low, and where this occurs the lender is normally able to arrange an acceptable repayment plan with the borrower. Lenders do not see significant losses from interest-only mortgages, meaning that the majority of borrowers’ repayment methods work.
CML director general Michael Coogan said:
"Interest-only mortgages are an appropriate choice for a range of different types of consumers, including borrowers who rationally choose them as an alternative to renting, financially capable customers who make acceptable arrangements to repay the capital over the long term, and buy-to-let investors.
"We do not want to see measures that would effectively regulate them out of the market, and we believe it is possible to address the FSA’s concerns, without imposing costs and requirements on lenders and borrowers that are likely to prove to be unacceptable."
The BSA also believes regulation of interest only mortgages could considerably restrict this market.
Paul Broadhead, BSA Head of Mortgage Policy said:
“Interest only mortgages are not in themselves inherently bad or high risk and the industry has been attentive about restricting their availability to suitable customers.
However, there is a real danger that the FSA could introduce over burdensome regulation that will stifle this market and affect many existing borrowers – including many for whom this is a suitable option.”
The FSA suggests lenders take greater responsibility for validating repayment methods at the start of the mortgage term and periodically thereafter. Broadhead is concerned about such a move:
“Lenders have a responsibility to make clear to borrowers the risks of interest only mortgages and to stress the need for a repayment method, but the FSA should avoid creating a moral hazard where customers take less interest in the performance of their finances in the mistaken belief that lenders are doing it for them.
Shifting this responsibility to lenders will not help borrowers make well informed and rational decisions, nor will it deliver a flexible mortgage market that works better for consumers.”
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